The Danger of Turning Cynical About Silicon Valley

Silicon Valley is losing its luster, at least among elite opinion-makers. An increasing number of critiques have been mounted in publications as diverse as The New Republic, The Weekly Standard, and Wired (to name only a few) based on charges of sexism, conspicuous consumption, inequality, and an attitude toward government and social problems ranging from naivete to disdain. Reports of an entrepreneur trying to teach a homeless man to code and, most recently, of one ranting publicly against the homeless haven’t helped. Perhaps most damning to entrepreneurs, inclined to pride themselves on what they produce, is the charge that many of the products Silicon Valley has been churning out are trivial.

Most of these critiques have merit, particularly those based on gender. But the economic case against startups is prone to overreach and represents a dangerous kind of cynicism. Tech entrepreneurs are not merely akin to Wall Street bankers, a younger, less formal set of oligarchs in waiting. Startups are an engine of prosperity, albeit a highly imperfect one. And if America’s media and cultural elite choose scorn over engagement, the whole economy will suffer.

Perhaps the most complete case for the wave of media disillusionment with startups is a September article in The New Republic by Noreen Malone who asks whether “tech entrepreneurs [are] replacing Wall Streeters as the rich bad guys in the popular imagination.” While noting that this doesn’t seem to be the case with respect to the public — both the computer and internet industries poll favorably — she documents at length the rise of “tech hate” among journalists and other commentators, including HBR contributor Umair Haque:

“Tech is something like the new Wall St. Mostly white mostly dudes getting rich by making stuff of limited social purpose and impact,” economist Umair Haque argued on Twitter. Tech-world denizen Jesper Andersen tweeted a similar sentiment: “Change ‘startup’ to ‘hedge fund,’ ‘ecstasy’ to ‘cocaine’, and ‘douche-bag’ to ‘douche bag’ and you too can see SF is just another Wall St.” Or this, from Mother Jones’ Clara Jeffrey: “I saw the best minds of my generation building apps to send sexts and brag about fitness and avoid the poors.”

By this logic, there’s no reason to applaud the growing number of graduates from top universities opting for jobs in startups and tech rather than finance. This equivalence is too cynical by half.

Though venture capital funds account for only about 0.2% of U.S. GDP, according to Harvard Business School professor Josh Lerner, venture-backed companies made up more than 11% of public firms as of 2011, with a total market value of $25.9 trillion. Moreover, those public firms employed 6% of the public-company workforce. Compared to the small amount we invest in them, startups have an outsized impact on the U.S. economy and on employment.

Of course, Wall Street also looks pretty good when dollars are considered a proxy for value created; a growing line of research argues that the increasing financialization of the economy is holding back overall economic growth. Could the same be true of the entrepreneurial sector? Quite the contrary. Though economic growth remains a highly uncertain area of study, virtually all economists agree that technological innovation plays a central role.

Tech startups play a critical role both in driving technological innovation forward and in bringing it to market. As Lerner writes, “Venture funding does have a strong positive impact on innovation. On average, a dollar of venture capital appears to be three to four times more potent in stimulating patenting than a dollar of traditional corporate R&D.” And the level of entrepreneurship predicts economic growth at a city level, even after accounting for numerous confounding variables.

How does all this square with the intuition that products and services like Snapchat aren’t the most valuable use of the tech sector’s time?

Actually, one line of thinking suggests that typical economic indicators drastically underestimate the social value of cheap internet-enabled entertainment. But the simplest answer is that while consumer-facing apps get most of the press, they’re only one piece of the startup ecosystem. Last quarter, within the dominant “Internet” category, the most venture capital deals were done in the areas of business intelligence and analytics, followed by advertising, HR and workforce management, and customer relationship management — all ways of using the Internet to make other businesses more efficient. By contrast, only 2% of deals went to social companies. Even in the mobile category, the number of deals in photo startups trailed behind CRM, analytics, and payments. And while Internet and mobile have together accounted for the bulk of VC deals in recent quarters, healthcare still represents a substantial chunk — 13% of deals and 16% of dollars in Q3.

The positive economic impact of the startup sector in no way diminishes the merit of other critiques against it, but recommends an approach that seeks to improve the industry rather than discredit it. Addressing Silicon Valley’s gender and class problems becomes even more urgent when one realizes the outsized role that the ecosystem plays in defining our economic lives.

Building useful products may not be the same thing as saving the world, but neither is it the same as doing nothing. Let’s not lose sight of the difference.